How to fix the eurozone? Does it even need fixing? Isn’t the European economy humming along nicely at last, nearly ten years after the start of the global financial crisis? Many of the hardest-hit governments have implemented severe reforms. Even France is having a go at it, following President Emmanuel Macron’s election last year. The eurozone’s public finances, at the aggregate level, are under control. Unemployment is roughly back to its 2008 level.

Even beyond the headline numbers, much has been done since the last crisis to strengthen the monetary union, including the creation of the European Stability Mechanism and the first serious steps toward a banking union.

But the work remains incomplete, with the eurozone at the mercy of another serious economic or financial shock. That could come from within (cough, Italy, cough) or from outside: a hard Brexit spinning out of control or a major trade war with the U.S.

One of the lessons of the last crash was that policymakers, investors or pundits rarely see the crisis coming. Hence, argue advocates of reform, now is the ideal time to consolidate a monetary union that has been a work in progress during its 20-year existence.

These are, among others, the topics we’ll focus on in the eight weeks of this Global Policy Lab. We won’t be the only ones doing so. French and German policymakers have spent much of the last six months trying to come up with a reform package that would satisfy Macron’s impatience and accommodate German Chancellor Angela Merkel’s cautiousness.

And in June, eurozone leaders will meet in Brussels to try and agree on a “road map” of what needs to be done. This summit will matter whatever its results. It’s an opportunity for eurozone leaders to overcome long-standing differences. Or it’s an occasion to prove they are incapable of putting in place reforms when not pressed by a burning crisis.

In the run-up to the summit, POLITICO intends to contribute to the debate. We are also counting on you: Send us your thoughts, either on which reforms you deem important, or on the policy stances of your various governments. We want this to be a lively debate, and this newsletter will reflect your contributions.

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Stat for thought

€2.02 trillion
Total eurozone public sector debt bought by the European Central Bank since March, 2015, under its quantitative easing program (as of April 30, 2018).

Your takes

Some of you have already written in with your thoughts and suggestions. We’ll refrain from commenting on your most radical proposals (“Break it up!” said one reader. “Get rid of the politicians!” opined another). But Jeremy Ghez, a professor at HEC in Paris, raises an interesting question when he writes that there is also a geopolitical angle to the eurozone story. He suggests that maybe it’s time for Germany to realize that the fiscal transfers it seems to loathe so much would make sense if the country at last stops “being a diplomatic dwarf” and invests real money in its global strategic position.

Ten years after the beginning of the global financial crisis, unemployment is back to its 2008 level — even if was already high by Western standards at the time.

And on the aggregate level, the monetary union is now close to balancing its books. The fact that unemployment remains so high confirms that the austerity policies Europe embarked on from 2011 to 2013 were too tough and contributed to lengthening the crisis’ impact.

Quote of the week

“The adjustment program [for Greece] was indeed too harsh. And [it] didn’t foresee the total collapse in hopes and expectations.”
— Vítor Constâncio, outgoing vice president of the European Central Bank, in a Financial Times interview this week.

And even though academics tried then — and keep trying — to overcome the long-standing intellectual and political differences between the two countries on economic and monetary policy, Martin expressed his “disappointment” at the German political debate since then. Berlin’s obsession on “moral hazard” and its persistent “nein” attitude, he said, is an obstacle to serious progress.

The June summit may come up with some important decisions that shouldn’t be dismissed, he said — such as a common backstop for the bank resolution fund. But the major risk is that the reform effort will leave the eurozone vulnerable to another major economic shock. And the effects could be dire. Europe is “socially weaker and more divided politically” than it was ten years ago, Martin noted, Even a small downturn could trigger a big flare-up. Read more here.

Required reading

Risk-sharing helps to reduce risk: In this perfectly timed speech, ECB President Mario Draghi weighs in on the current eurozone reform debate, and insists the monetary union needs a common fiscal capacity — whether to fund supranational public goods — like security, defence or migration — or a full-fledged common budget. This will not be “politically simple,” Draghi notes (really?), but it will be necessary nonetheless.

Germany’s great European heist: Adam Tooze, a professor at Columbia University and Shahin Vallée, senior economist at Soros Fund Management, tried applying Germany’s principles on eurozone integration to the mutualization of defense commitments. The results? “If the French were to apply a simple spending rule, they would find that since 1990 they had cumulatively spent 30% of GDP more than Germany on defense.” The authors’ conclusion: “The quid pro quo that France should demand for cooperation on security policy is that Germany recognizes the same reality with regard to economic policy.”

No deal is better than a bad deal on eurozone reform. This is a punchy op-ed from Peter Bofinger, a member of Germany’s Council of Economic Experts (the body known as “the five sages”), who takes his French and German colleagues to task for being too timid. Their approach to risk-sharing is too cautious and the trust they place on “market discipline” is naïve and misplaced. The only way to make the eurozone stable, Bofinger argues, is to “go ahead with political integration,” complete with a common budget and eurobonds. This might not be feasible for the moment, but “for economists this is not an excuse for not making explicit what is really required to stabilise the architecture of the euro area.”

What do you think?

Next week, we’ll look at the much talked about banking union. Setting up a common supervisor for eurozone banks is rightly hailed as the most important reform implemented in the heat of the crisis. So why is it taking so much time and why does it look so difficult to complete? Send any thoughts, feedback or suggestions to: globalpolicylab@politico.eu.

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